Momentum Productions Pty Limited v Lewarne [2007] FCA 1988

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 Federal jurisdiction was attracted in this matter by claims made under the Trade Practices Act 1974 (Cth). The proceedings concerned the circumstances surrounding the purchase of a hotel named the East Village Hotel at 234 Palmer Street, East Sydney. The purchase involved the assignment of a lease of the hotel premises as well as the purchase of the business carried on at those premises. The persons involved included the second appellant Richard James Scotts, his brother Anthony Scotts and the respondent Richard John Lewarne, who were the main players. Although Mr Anthony Scotts was involved in the transaction, he was not a party to the proceeding, nor did he give evidence. 2 On 7 August 2007 the primary judge delivered a 56-page judgment on the question of liability. The issues which were canvassed included Trade Practices claims, partnership issues and contract issues. Her Honour directed the parties to bring in Short Minutes of Order for the resolution of the proceedings in the light of her findings and reasons. 3 On 9 October 2007 her Honour made a number of orders providing for relief in the proceedings and dealing with costs. In support of the orders which were made on 9 October 2007, the primary judge delivered further reasons for judgment which occupied some eight pages. 4 The proceedings at first instance bore the identification number NSD 1985 of 2005. A Notice of Appeal was filed by the appellants on 30 October 2007, which in turn was replaced by an Amended Notice of Appeal filed 16 November 2007. The identification number for the appellate proceeding is NSD 2155 of 2007. 5 On or about 15 or 16 November 2007 the Court was approached by the appellants' current solicitors with a view to having an urgent hearing of an application for a stay pending the determination of the appeal. The corresponding Notice of Motion was filed in the proceedings bearing the number NSD 1985 of 2005, but it may be taken that the application is one which is brought in the appeal, which bears the number NSD 2155 of 2007. 6 It was indicated that the matter could come before the Court on 19 November but a request was made to push the application for a stay back to a later day this week. As it transpires, the matter was listed for hearing of the stay application before me as the duty judge at 4:30 pm today, 22 November 2007. It is now 6:50 pm. Yesterday a Notice of Motion seeking the stay was filed and made returnable for 4:30 pm today. 7 Reference has been made to various affidavits which have been filed for the second appellant, for the respondent and for Mr John Vouris, a receiver and manager of the assets of a partnership which the primary judge found to have come into existence and to have been dissolved on 20 November 2006. 8 The respondent initially took the view that this matter should be dealt with by a Full Court. However, as the matter progressed, it became clear that the urgency associated with the hearing required it to be dealt with now, even though the application came before a single judge of the Court, which of course is permitted by Order 52 rule 17 of the Federal Court Rules ('the Rules'), under which the application is made. 9 Whilst the affidavits have not formally been read, much has been said about the case by counsel for the appellants and by counsel for the respondent and by counsel for Mr Vouris and I have been invited to deal with the application on the basis of the facts as they have been disclosed to me, most of which have been drawn from the reasons for judgment of the primary judge of 7 August 2007. 10 The reason for the urgency is that the second appellant has been confronted with a bankruptcy notice served upon him by the receiver and manager requiring the payment of $418,671.73 within 21 days. The bankruptcy notice was apparently served on 12 November 2007, which would mean that compliance would be required on or before 3 December 2007, or thereabouts. The bankruptcy notice itself was founded upon order 5 made by the primary judge on 9 October 2007. 11 I will not take time to set out all of the orders made by the primary judge on 9 October 2007, but I should set out those orders which were identified as orders numbered 1, 2, 3, 4, 5 and 6: 'THE COURT ORDERS AND DECLARES THAT: 1. The partnership between the Applicant and the Respondents in operating the business conducted at the East Village Hotel situated at 234-236 Palmer Street, Darlinghurst NSW being Lot 1 in Deposited Plan 82439 ('Partnership') was terminated on 20 November 2006 pursuant to ss 26 and 32 of the Partnership Act 1892 (NSW). 2. Mr John Vouris, of Level 9, 1 O'Connell Street Sydney NSW 2000, having consented to the appointment, be appointed receiver and manager of the Partnership and the Partnership Business ('Receiver') without security. 3. The Receiver have the same powers with respect to the Partnership and the Partnership Business as those contained in s 420 of the Corporations Act 2001 (Cth), as if the Partnership Business were the property of a corporation. 4. The assets of the Partnership and the Partnership Business be realised by the Receiver and the proceeds be applied by the Receiver in due course of administration in accordance with orders 9 and 10 of these orders. 5. The Second Respondent pay to the Partnership the amount of $416,276.71 together with interest on that sum pursuant to s 52 of the Federal Court of Australia Act 1976 (Cth). 6. The Second Respondent holds his interest in the property known as unit 18, 14 Robertson Street, Narrabeen NSW, being Lot 18 in Strata Plan 4575, subject to an equitable charge in favour of the Partnership to secure the amount referred to in order 5. …' 12 Exhibit RJS6 to the affidavit of the second appellant affirmed 21 November 2007 was a statement of assets and liabilities of the second appellant dated 21 November 2007. It revealed net assets of $142,846. It is unnecessary for present purposes to detail the various assets or the liabilities. Suffice it to say that the net assets roughly equate to what is anticipated will be the net proceeds of sale of two properties located at 23 and 24 Albany Street, Crows Nest, which are presently the subject of an exchanged contract for sale of land under which the consideration payable is said to be $1 million and on which the mortgages affecting the property cover a liability of $876,000. No doubt it is anticipated that that sale will be settled in the not too distant future. 13 Were the Court not to grant a stay, then it is apparent that an act of bankruptcy would be committed upon the second appellant's failure to comply with the bankruptcy notice on or before 3 December 2007. In the affidavit of the second appellant he said that he would be unable to pay the amount of $418,671.73 specified in the bankruptcy notice within the 21 day period for which it allows. 14 In the event of an appeal, the power of the Court to order a stay of execution under the judgment appealed from is to be found in Order 52 rule 17 of the Rules, which relevantly provides: '17(1) An appeal to the Court shall not: (a) operate as a stay of execution or of proceedings under the judgment appealed from; … except so far as the Court or a Judge or the court below may direct. … (3) An application for a direction of the Court or a Judge under subrule (1) shall be made to the Court or a Judge by motion upon notice …' 15 The principles relating to the circumstances in which it is appropriate to order a stay are now well-established. One of the primary sources of the relevant principles is to be found in the joint judgment of Kirby P, as his Honour then was, Hope JA and McHugh JA, as his Honour then was, in Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685 ('Cambridge Credit Corp'), especially at 694-695. Their Honours said at 694: 'It is sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour'. Their Honours referred with approval to a passage from a judgment of Mahoney JA in Re Middle Harbour Investments Ltd (In Liq) (New South Wales Court of Appeal, 15 December 1976, unreported) ('Re Middle Harbour'). In that case his Honour said: '… Prima facie, a successful party is entitled to the benefit of the judgment obtained by him and is entitled to commence with the presumption that the judgment is correct. These are not matters of rigid principle and a court asked to grant a stay will consider each case upon its merits, but where an applicant for a stay has not demonstrated an appropriate case but has left the situation in the state of speculation or of mere argument, weight must be given to the fact that the judgment below has been in favour of the other party.' 16 Other matters adverted to by the Court of Appeal in Cambridge Credit Corp were: * the onus is upon the applicant to demonstrate a proper basis for a stay that will be fair to all parties (at 694); * the mere filing of an appeal will not, of itself, provide a reason or demonstrate an appropriate case, nor will it discharge the onus which the applicant bears (at 694); * where there is a risk that the appeal will prove abortive if the appellant succeeds and a stay is not granted courts will normally exercise their discretion in favour of granting a stay (at 695); * although courts approaching applications for a stay will not generally speculate about the appellant's prospects of success, given that argument concerning the substance of the appeal is typically and necessarily attenuated, this does not prevent them considering the specific terms of a stay that will be appropriate fairly to adjust the interest of the parties, from making some preliminary assessment about whether the appellant has an arguable case (at 695); * the Court has a discretion whether or not to grant the stay and, if so, as to the terms that would be fair. In the exercise of its discretion, the Court will weigh considerations such as the balance of convenience and the competing rights of the parties before it (at 694); * where there is a risk that if a stay is granted, the assets of the applicant will be disposed of, the Court may, in the exercise of its discretion, refuse to grant a stay (at 694). 17 In Powerflex Services Pty Ltd v Data Access Corporation (1996) 137 ALR 498 at 499, Burchett J referred to Order 52 rule 17 and said: 'The language of that rule suggests no limitation upon a broad discretion inhering in the court. Several judges of the court, most recently Heerey J in Henderson v Amadio Pty Ltd (No 4) (1996) 136 ALR 593, have followed the decision of the Court of Appeal of New South Wales in Alexander v Cambridge Credit Corp Ltd (recs apptd) (1985) 2 NSWLR 685' 18 His Honour also referred to the Court of Appeal's approval in Cambridge Credit Corp of the statement of Mahoney JA in Re Middle Harbour. 19 My understanding of the facts of this matter, which are derived from the primary judge's reasons for judgment of 7 August 2007, are that the respondent, Mr Lewarne, contributed $300,000 to the relevant enterprise concerning the East Village Hotel. 20 His case, as I understand it, was presented at trial on the basis that whether you viewed the contribution as an acquisition of an entitlement to receive a percentage of the issued capital of the corporate vehicle being used to acquire the hotel, namely the first appellant, or you viewed the contribution as one which gave him an interest in a partnership which was to carry on the business, he was induced to make his contribution on the basis of representations made to him by the second appellant which were misleading or deceptive or likely to misled or deceive within the meaning of s 52 of the Trade Practices Act 1974 (Cth). 21 Senior counsel for the appellants, Mr Ashhurst, has made it clear more than once that no challenge will be made on the hearing of the appeal to the findings of misleading and deceptive conduct which were made by the primary judge adverse to the second appellant. 22 The main focus of the appellants' challenge seems to be in respect of the finding made by the primary judge that Mr Lewarne became a partner in the business. In terms of whether or not a stay should be ordered, it seems to me to be of particular significance that no challenge is made to the findings of misleading and deceptive conduct which induced Mr Lewarne to part with his money which, as I understand it, he indicated he would not have done had he been aware of the falsity of the matters represented to him. 23 I will refer to certain specific passages from her Honour's reasons for judgment of 7 August 2007 where she dealt with the question of partnership. At [63] – [66] her Honour said: '63 There is no credible support for the proposition that the (sic) Mr Lewarne and Mr Scotts agreed on a share sale and I am satisfied they did not do so. For reasons that I shall explain in some detail I have concluded that they intended their contract to be one of partnership. 64 The Partnership Act 1892 (NSW) defines the partnership relationship as one 'which exists between persons carrying on a business in common with a view of profit'; s 1. Section 2 of the Act provides rules to which the Court must pay regard in determining whether a partnership exists. Stated briefly, these rules are that joint ownership of land or other property does not of itself create a partnership, that the sharing of gross returns does not of itself create a partnership and that the receipt by a person of a share of the profits of a business is prima facie evidence of partnership. 65 The importance of agency and, particularly, of a mutuality of rights and obligations in the partnership relationship was emphasised in Duke Group Ltd (in liq.) v Pilmer (1999) 73 SASR 64. Although the decision of the South Australian Supreme Court was reversed by the High Court in Pilmer v Duke Group Ltd (2001) 207 CLR 165 this aspect of the decision was unaffected. The relationship between Mr Lewarne and Mr Scotts was accepted by them as involving a mutuality of rights and obligations that was consistent with them being in partnership as that relationship is defined in the Partnership Act. 66 First, there is considerable evidence to suggest that the agreement struck between the parties was that Mr Lewarne would have a 15% share of the profits of the hotel. The whole tenor of their discussions in the period leading up to the payment by Mr Lewarne was that they would carry on the business in common with a view to making a profit. The evidence is not limited to their use of the words 'profit share' in documents and conversation. Rather, it establishes that the parties knew and understood that one of the terms of their agreement was that Mr Lewarne would receive a share of the profits of the East Village Hotel.' (Emphasis added) 24 Earlier, at [48], the primary judge said: '48 … It is likely that Mr Anthony Scotts was also a member of the partnership from the same date [the date of a preliminary contract referred to by her Honour] however I have only limited evidence on this point which I have not been asked to decide. …' 25 The basis for her Honour's findings in respect of partnership would appear to have included a statement which her Honour found the second appellant made to the respondent on 14 May 2003, which is referred to at [33] as follows: 'The lease and the liquor licence will be transferred to Momentum. I will run the business on behalf of you and Anthony, but I'll consult both of you about any major decisions that come up.' 26 The conversation was denied by the second appellant, but the second appellant recalled that at the meeting the respondent had indicated that he would arrange for his solicitor to draft a formal agreement. At [69], her Honour said: '69 In cross-examination, Mr Scotts assented to the proposition that the parties agreed that Mr Lewarne, Mr Anthony Scotts and he would 'all be involved in this business and work co-operatively together'and to the further proposition that even though he had 'day to day management responsibilities' the parties were 'all together there in common to make the business profitable and work' …' (Emphasis added) 27 It seems to me that there was an ample basis in the evidence to which her Honour referred for her finding that the parties had agreed that they would carry on business in common with a view to making a profit and thereby constitute a partnership. It has not been suggested by senior counsel for the appellants that there was no evidence to sustain the partnership finding. 28 One of the representations upon which the respondent relied was referred to as the eighth representation, to the effect that his $300,000 payment would be applied to the business of the partnership either as working capital or as part of the purchase price to be paid to Wellfox, whom I understand to have been the vendor of the business. At [151] her Honour said: '151 … I am satisfied that Mr Scotts [referring to the second appellant] represented to Mr Lewarne [the respondent] that the $300,000 he received from Mr Lewarne would be used for the benefit of the partnership although exactly in what manner is not clear.' 29 It is clear that her Honour found that the respondent relied upon the representations which were made to him by the second appellant. At [158] her Honour said: '158 Mr Lewarne repeatedly said that each and every one of the representations was influential in his decision to invest money in the partnership. This claim of reliance was not seriously challenged and I am satisfied that, to a greater or less (sic) extent, the representations that were made were factors in Mr Lewarne's decision to invest his money in the East Village Hotel business. I have discussed the question of reliance in relation to the first and ninth representations above at [99]-[103] and [106] respectively.' 30 I have been taken by senior counsel for the appellants to various passages in the joint judgment of Doyle CJ, Duggan and Bleby JJ in Duke Group Limited (In liquidation) v Pilmer (1999) 73 SASR 64 which considered what was necessary for a finding of partnership to be made. This included passages from their Honours' reasons for judgment at [929], [937], [945], [954], [955] and [956]. 31 It seems to me that, having regard to the statement of Mahoney JA, the case does not rise above one where the situation is other than one of mere argument as to whether or not her Honour correctly concluded that a partnership had been constituted. In any event, it seems to me that this is not material, as however the enterprise was structured the respondent parted with $300,000 and ended up receiving nothing of any value. 32 The business of the hotel failed, so it would seem, because, amongst other things, the premises were in a state of repair which led to the business being interrupted whilst rectification work was carried out. I do not profess to be well-versed in what the nature of the problem was, but the premises, in effect, let the team down. 33 The Amended Notice of Appeal contains eight grounds of appeal as follows: '1. Her Honour erred in finding that the relationship between the parties to operate the business conducted at the East Village Hotel was one of partnership. 2. Her Honour erred in failing to find that there was an agreement whereby the Respondent agreed to pay $300,000 for 15% of the shares in the First Appellant. 3. In the alternative to 1 and 2 above, her Honour erred in making any declarations or orders in respect to any partnership to operate the business of East Village Hotel because one of the partners, namely Mr Anthony Scotts, was not a party to the proceedings. 4. Her Honour erred in making orders for the payment of monies by the Second Appellant to the partnership and for a charge over the property at 18/14 Robertson Street Narrabeen NSW ("the Property") in circumstances where no final accounting had occurred in respect of the partnership. 5. Her Honour erred in finding that the payment of $300,000 to discharge the mortgage over the property was not for the benefit of the partnership because the said property was mortgaged to raise funds for the purchase of the East Village Hotel business. 6. Her Honour erred in making orders in respect to the distribution (sic) of assets in settling accounts between the partners which were inconsistent with section 44 of the Partnership Act 1892 (NSW). 7. Her Honour erred in ordering that the respondent be paid an amount representing profit as damages under the Trade Practices Act 1974 (Cth.) and/or Fair Trading Act 1987 (NSW) because: a) such damages were calculated on an incorrect basis, being as if the misleading or deceptive conduct found by her Honour was not misleading or deceptive rather than as a measure of the loss or damage the Respondent suffered by the misleading or deceptive conduct; and/or b) such damages were excessive as they were in addition to the return of the Respondent's capital contribution to the partnership found by her Honour. 8. Her Honour erred in making orders requiring damages pursuant to the Trade Practices Act and/or the Fair Trading Act be paid out of the assets of the partnership found by her Honour because the effect of such orders was to give the Respondent security for an award of damages.' 34 It may be that the orders which her Honour made were not consistent with the standard form of decree for dissolution of a partnership and for the appointment of a receiver and manager such as one finds set out in Miller and Horsell, Equity Forms and Precedents (NSW) (1934) at page 260. However, it was open to her Honour by means of a combination of appropriate relief in a partnership suit coupled with relief ordered under s 87 of the Trade Practices Act 1974 (Cth) to do what she did. 35 I am not satisfied that the conditions proposed by the appellants are sufficient to meet the prejudice that will be suffered by the respondent were a stay to be granted. What is proposed is to the effect that when the net proceeds of sale of the Crows Nest properties are in hand (approximately $140,000) they will not be used without the leave of the respondent for any purpose other than funding the appellant's prosecution of this appeal and the prosecution of proceedings apparently brought against the landlord in the Supreme Court of New South Wales in respect of the state of the premises. 36 I should add that the business of the hotel is no longer trading. It is unclear to me at the moment whether the lease was terminated by the landlord or the lease was surrendered by the receiver and manager but, as I understand it, the business is not trading. 37 I am informed by counsel for the receiver and manager that there is about $16,000 in cash that was recovered upon entry into possession of the partnership assets and there is unsold stock in trade and plant and equipment of the hotel. The stock in trade is said to be the subject of an offer of $33,000 from the landlord, although an earlier valuation obtained by the receiver and manager was of the order of $20,000. There is also the plant and equipment which is yet to be realised. 38 In my opinion the appellants have failed to demonstrate a reasonable or appropriate case to warrant the exercise of discretion in their favour on the current application. 39 Having regard to all of the matters of principle to which I have earlier referred I consider that the application for a stay should be dismissed. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Graham.